Investing in blockchain technology

Big business has been wooed by the potential of blockchain technology, while cryptocurrencies have won the hearts of retail investors. We have a look at how markets are adopting blockchain, and how you can gain exposure to the true value hiding in the market.

IG Analyst

2018-02-14T17:39:18+0000

Source: Bloomberg

Blockchain and cryptocurrency: what does big business think?

‘Bitcoin is just one example of something that uses a blockchain. Cryptocurrencies are just one example of decentralised technologies. And now that the Internet is big enough and diverse enough, I think we will see different flavours of decentralised technologies and blockchains. I think decentralised networks will be the next huge wave in technology,’ – Melanie Swan, author of Blockchain: Blueprint for a New Economy.

Cryptocurrencies were designed to frustrate the financial institutions, businesses and governments that are at the heart of the modern-day world economy. So it’s unsurprising that they have described cryptocurrencies as ‘Ponzi schemes’, ‘fraud’, and even ‘evil’.

JPMorgan's chief executive, Jamie Dimon, may be the best example to demonstrate what type of attitude industry has toward cryptocurrencies – one of confusion. The high-profile CEO took an extremely hard-line on cryptocurrencies when the hype started to build, threatening to sack staff investing in virtual currencies and calling it all a scam, before admitting he regretted that stance earlier this year.

Looking beyond bitcoin: where else can you find volatility and tradeable price movements?

Although the debate over the value and purpose of cryptocurrencies will rumble on, there is an overwhelming consensus around the huge potential of the blockchain technology that forms the backbone of all cryptocurrencies. While blockchain is essential to the survival of cryptocurrencies, blockchain can exist without cryptocurrencies.

From this, big business has come up with a mantra that doesn’t seem to be waning – bitcoin is bad, blockchain is brilliant.

What is blockchain technology?

Nearly every transaction we undertake is managed by a middleman. If you pay for something in a shop using your debit card, then you rely on the bank or payment processor to complete and guarantee the purchase. If you send an email or instant message, you rely on the email or messaging provider to send your message.

At the simplest level, a blockchain is a sophisticated distributed database controlled by everyone using it, rather than one central authority like a bank or payment processor. With a blockchain, there are no middlemen. It is a type of distributed ledger that continuously updates digital records of who owns what. It records transactions in real-time across all of the computers using the system, so the record cannot be retroactively altered or changed without the agreement of everyone using the blockchain.

The perceived benefits are wide-ranging. Hacking such a large volume of computers which are not under a single point of control is almost impossible. That, combined with encryption, means users have confidence that all records cannot be tampered with to create trust. The automated nature means transaction times can be shortened, and the lack of a middleman means the cost of doing business through a blockchain is also cheaper.

Blockchain technology is highly diverse and flexible, and this is derived from its ability to facilitate ‘smart contracts’. Any form of asset - such as currency, stocks, or even a deed to a house – can be deposited within the blockchain and programmed to react when a certain trigger is met. This essentially automates processes usually carried out by middlemen, transferring an asset once payment has been received, or returning the asset to its owner when payment has not been made, for example.

This could also be extended so the blockchain is linked to the performance of another asset, like programming the blockchain to sell shares in a company once the share price hits a certain level.

The Ethereum Virtual Machine is more leaned toward processing complex smart contracts, making Ethereum one example of how blockchains and cryptocurrencies, as well as their role, continue to develop over time.

Different types of blockchain technology

According to Coinmarketcap, only 12 cryptocurrencies carry a market cap of over $5 billion. But over 1300 cryptocurrencies exist, including many of the failures, as constant tweaks are made. It's important to recognise that each cryptocurrency and blockchain differs in some way or another.

The most understood cryptocurrencies are those that are designed to facilitate payments, like bitcoin or litecoin. These are peer-to-peer currencies using a public blockchain, accessible by anyone with a good enough computer.

Then there is a private blockchain, which brings the blockchain back under one central point of control. A company or institution can insert whatever level of control they deem necessary into a blockchain (such as what customers and employees can access), while benefiting from the encrypted-level security, automated processes, and cost-saving benefits of operating an internal blockchain.

Then there is a mix between the two, which is being spearheaded by consortiums. A group of companies share a blockchain, such as all of the major international banks. No single bank is in control, instead all the banks come to a consensus. Think of it is a blockchain for private members.

Blockchain has endless possibilities and there is no doubt that the potential of blockchain reaches far beyond cryptocurrencies. In addition to recording financial transactions, it can record any type of digital transaction. This means it can be used to record changes to any digital information (like medical records) or record any transactions using digital assets (like house deeds).

As a result, the versatile technology has attracted interest from all types of sectors, as demonstrated by a report from CB Insights which outlines 36 of the biggest industries that could be transformed by blockchain.

36 industries that could be transformed by blockchain technology

Banking

Messaging apps

Hedge funds

Voting

Internet identity and DNS

Critical infastructure security

Ride-sharing

Internet advertising

Crypto exchanges

Education & academia

Car leasing and sales

Industrial IOT and mesh networking

Cloud storage

Cloud computing

Forecasting

Music/entertainment right and IP

Stock trading

Real estate

Insurance

Healthcare

Supply chain management

Energy management

Sports management

Gift cards and loyalty programmes

Government and public records

Gun tracking

Wills and inheritances

Retail

Charity

Law enforcement

Human resource

Business and corporate government

Credit histories

3D printing/manufacturing

Crowdfunding

Commodity-backed currency

(Source: CB Insights)

Investing in cryptocurrencies vs investing in blockchain

Investing in cryptocurrency is very different to investing in a company. When you purchase shares in a business, you own part of that business. When you purchase cryptocurrency, you receive digital codes that each serve different purposes - you don’t own any part of the company that created the cryptocurrency, nor the blockchain.

Take ripple as an example. The company has two core elements – its RippleNet blockchain, and its 'digital asset' XRP. XRP isn't so much a cryptocurrency, as you can't buy anything with it like bitcoin or litecoin. Its sole function is to improve liquidity within the global payments system by lubricating the blockchain.

There is an impressive list of clients using RippleNet, which is designed to connect banks and payment providers, and speed up the transfer of money around the world. But the clients do not need to use or purchase XRP in order to use RippleNet.

By late 2017, there were over 100 companies signed up to use RippleNet, but just one trialling XRP. The pace has since picked up, and there is now a handful of clients that are trialling XRP in various forms, including some high-profile names like MoneyGram International. The company has asserted that many banks are planning to take up XRP in the near future.

So, where does the value in XRP arguably lie? Eventually, ripple believes the demand for the finite amount of XRP in existence will come from the growing list of businesses using RippleNet opting to use XRP. In the cryptocurrency space, who better to chase you for your valuable cryptocurrency than the big banks?

But what if the blockchain becomes successful without the cryptocurrency, and the ‘bitcoin bad, blockchain brilliant’ mantra is true? Well, in theory the company becomes highly successful, banks modernise the global payments system using the blockchain, and the investor is left with a crypto-wallet that may as well be stuffed with Zimbabwean dollars (which could at least serve as a reminder of what can happen to any currency, fiat or digital).

Initial coin offerings vs initial public offerings

Initial coin offerings (ICOs) have been one of the most controversial developments in the market. ICOs are now the favoured way for start-ups to raise the initial funds they need to create a new cryptocurrency or blockchain project. A certain portion of the new cryptocurrency is sold to early buyers, who hope the value of those cryptocurrencies rise in the future, so they can book a profit.

This is very different to initial public offerings (IPOs), whereby you purchase equity in a business. The two primary reasons a private company completes an IPO is to either raise large amounts of funds it could not otherwise be able to raise, primarily for ambitious expansion plans or as a way for the private and early investors to cash-out. IPOs are used by existing owners to exit an investment, while ICOs are used by start-ups to enter the market.

How to invest in blockchain

Cryptocurrency enthusiasts and corporations will continue to butt heads over the future of bitcoin and all its variations, but they both subscribe to the view that blockchain technology can revolutionise the world – even if they both want different types of revolution.

There is a variety of ways to gain exposure to blockchain technology without purchasing cryptocurrency.

Blockchain consortiums

Nearly every big tech giant and financial institution has now started to develop or invest in blockchain technology, and there is a lot of collaboration going on. Over 40 consortiums had been formed by August last year, according to Deloitte, and that number will grow. Financial services has been the quickest industry to partner up, with groups like R3, but more industries will follow as new uses for blockchain technology are discovered.

Blockchain: what's in a name?

Echoing a similar trend during the Dotcom bubble in the 1990s, when firms rushed to add '.com' to their names, many companies have seen their share price rocket by simply adding 'blockchain' or something similar to stir things up. Even US drinks maker Long Island Iced Tea is now Long Blockchain Corp. Shares closed up 183% on the day of the announcement, providing a surge, followed by severe price movements in the following days to rival the volatility shown by cryptocurrencies. Shares have since dropped significantly – although shares are still trading higher than before the name change.

A 'Kodak moment' use to represent a unique, rare moment. Now, it is increasingly used as a term to refer to those that fail to keep up with the market and respond to disruptive technology. Eastman Kodak shares climbed higher earlier this year after unveiling a licensing partnership with WENN Digital to launch the KODAKOne blockchain, aimed at managing image rights for photographers, and the KODAKCoin to go with it.

Kodak is one of the biggest names to lend its name to the blockchain effort, but what good it has done is still being scrutinised. The ICO for KODAKCoin is still open.

Blockchain companies

There are a lot of small-caps that have moved into this space. Coinsilium was the first blockchain investment company in the world to complete an IPO (not an ICO) on a recognised exchange. There is a broad spectrum of activity to present opportunities for different investors.

Company name

Blockchain activity

YouGov

Developing advertising platform, YouGov Direct

Block Commodities

Supply chains for commodities in Africa

Bottomline Technologies

Domestic and international payment processing

Blockchain Worldwide

Blockchain investment company

Glance

B2C loyalty marketplace

Kryptonite1

Investor in tokens and token-based projects

Clear Leisure

Invested in 'mining' IT firm Miner One

Draper Esprit

Invested in French security firm Ledger

Veltyco Group

Majority control over crypto-wallet firm Varkasso

WANdisco

Expanding patented tech into blockchain

Vela Technologies

Investing in 'miners' and Mining-as-a-Service (MaaS)

Tekcapital

Raised funds through 'token generation event'

Cnet Telecom

Token Cnet5G, powered by smart contracts on Ethereum

DigitalTown

Local B2C platform for London with 'CityShares'

Workday

$250 million fund for new tech, including blockchain

TechFinancials

Interest in blockchain-for-diamonds firm Cedex

ADVFN and On-Line

Social media cryptocurreny PlusOneCoin with wallet

Blue Star Capital

SatoshiPay partners Stellar Development Foundation

360 Blockchain

Investor in blockchain technology, mining ventures

BTCS

Invests in cryptocurrencies

BTL Group

European energy project using platform Interbit

DigitalX

ICO advisory services, consulting, software development

eXeBlock Technology

Consulting, application development, customisation

HIVE Blockchain

Traditional capital markets, mining partnership

HashCash Technology

Mining company based in Canada

Cryptocurrency mining machines: hardware manufacturers

A final group to consider can be easily overlooked. Many (but not all) cryptocurrencies are made through a process known as mining. With fiat currency, a central bank controls the supply and distribution of money.

With no central authority, bitcoins are mined by computers (mining rigs) using special software to solve complex maths problems in exchange for newly created bitcoins. This is what incentivises people to contribute their computers in order to maintain the blockchain system.

This requires some serious hardware, opening up opportunities for the firms that create the processors and chips used to mine new coins. Although more commonly used by gamers, graphic processing units (GPUs) account for almost two-thirds of the total cost of a complete mining rig, according to a report last year from RBC Capital Markets.

NVIDIA Corp dominates the GPU market, accounting for well over 70% of all sales, with Advanced Micro Devices (AMD) representing the main competition. However, application-specific integrated circuits (ASICs) are growing in popularity with miners, as GPUs have been criticised for not being powerful enough – and neither Nvidia or AMD make ASICs, but are both expected to release new GPUs specifically designed for mining in the near future.

Meanwhile Micron Technology, the largest memory chip maker in the US, could also benefit from its parts being used in rigs, while sales of Intel’s processors are likely to rise. Intel contributed its distributed ledger platform to the Hyperledger consortia, and also offers Software Guard Extensions to improve privacy and security of blockchain transactions.

Conclusion

‘They should be talking about the companies. Bitcoin could turn out to be the winner; it could also turn out to be Betamax,’ - David Stockman, former director of the US Office of Management & Budget (1981-1985).

The storm around cryptocurrencies can sometimes obscure our views of other aspects of the market. Companies and investors hold differing views of where the value is hiding.

With cryptocurrencies worth hundreds of billions of dollars, and forecasts from MarketsandMarkets predicting the blockchain market will be worth over $7.6 billion by 2022 (from $240 million in 2016), the stakes are high, but there is no reason both can’t enjoy success.

Share this article

IGA, may distribute information/research produced by its respective foreign marketing partners within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

This information/research prepared by IGA or IGA Group is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. In addition to the disclaimer above, the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.

All forms of investments carry risks. Such investments may not be suitable for everyone and can result in losses that exceed deposits, so please ensure that you fully understand the risks and costs involved by reading theRisk Disclosure Statement.

IG provides an execution-only service. The information herein does not take into account the specific objectives, financial situation or particular needs of any person. Where in doubt, you should seek advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit.

IG Asia Pte Ltd (Co. Reg. No. 200510021K) holds a capital markets services licence from the Monetary Authority of Singapore for dealing in securities and leveraged foreign exchange trading and is an exempt financial adviser. It is also licensed by Enterprise Singapore to trade CFDs on commodities.

The information on this site is not directed at residents of the United States or Belgium and is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.